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Market Wrap

Out Of Hibernation

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      04-03-2002          High     Low     Volume Advance/Decline
DJIA    10198.29 -115.42 10339.86 10139.48 1.21 bln   1161/1984
NASDAQ   1784.35 - 20.05  1813.36  1770.61 1.55 bln   1361/2117
S&P 100   566.03 -  5.45   573.00   562.67   Totals   2522/4101
S&P 500  1125.40 - 11.36  1138.85  1119.68             
RUS 2000  496.60 -  3.89   501.53   495.87
DJ TRANS 2747.31 - 42.88  2795.30  2736.02
VIX        21.59 +  0.91    22.13    21.01 
VXN        41.10 +  1.78    41.39    39.86
TRIN        2.07 
Put/Call    0.64

Out Of Hibernation

The major market averages finished lower across the board Wednesday. Profit warnings and escalated tensions in the Middle East pressured shares throughout the day. But a late announcement from Dell Computer (NASDAQ:DELL) could change the tone Thursday, at least in the technology space.

Bad Kitty

The Dow Jones Industrial Average ($INDU) fell to 10,198, lower by 115 points, or a little more than 1 percent. J.P. Morgan Securities downgraded INDU component Caterpillar (NYSE:CAT) Wednesday morning. The stock was the worst performing component with its 2.62 percent drop. Other notable movers to the downside included United Technologies (NYSE:UTX), 3M (NYSE:MMM), Alcoa (NYSE:AA), and Microsoft (NASDAQ:MSFT). Even DuPont (NYSE:DD), who raised the bar Wednesday morning, finished 1.43 percent lower.

The weakness in the cyclical-laden INDU came on the heels of the Institute for Supply Management's (ISM) non-manufacturing (services) index for March. The reading fell to 57.3 percent, below February's 58.7 percent, but still above the expansion- revealing level of 50. Nevertheless, the rate of expansion slowed during March.

Poorer Poor's

The economic data, along with geopolitical fears, spread into the broader market, pressuring the S&P 500 (SPX.X) 1 percent lower. The SPX.X finished at 1125, lower by 11 points. On a technical note, the SPX.X closed below its simple 50-dma for the first time since late February.

The weakness in the financial and information technology complexes pressured the SPX.X. The broader financial group, which includes banks, brokers, and insurers, is the largest industry component of the SPX.X, accounting for about 19 percent of that index. Information technology is second, accounting for about 16 percent of the SPX.X as measured by market cap.

Soft Speak

The Nasdaq-100 (NDX.X) was hammered for the second consecutive session on growing earnings fears. The NDX.X finished below the 1400 level for the first time since late February at the 1394 mark, off by a little more than 1 percent. Concentrated weakness in software and semiconductor shares pressured the tech-heavy NDX.X.

The single biggest contributor to the NDX.X's weakness was Microsoft (NASDAQ:MSFT). The stock was hit again following the Axe's bearish waxing Tuesday. Softee accounts for about 10.50 of the NDX.X and an even bigger portion of the Software Sector Index (GSO.X), which finished 2.26 percent lower.

"Truckin', Got My Chips Cashed In..."

The Dow Jones Transportation Average ($TRAN) was the worst performing broad market measure in Wednesday's session. The index finished 1.53 percent lower to the 2747 level. Counter to the recent trend, the worst performing components of the TRAN Wednesday were away from airline shares. Granted, Delta (NYSE:DAL) was grounded again Wednesday, but most airlines traded well. Instead, names like Norfolk Southern (NYSE:NSC), Roadway (NASDAQ:ROAD), Alexander & Baldwin (NASDAQ:ALEX), and Union Pacific (NYSE:UNP) were hit hardest.

I find the move in the TRAN over the last three trading days the most disconcerting as it relates to the economy and ultimately the market. I consider the TRAN a key indicator for the health of the economy. It's this simple: increased economic activity requires increased transportation services. If you're a believer in the economic rebound thesis, you have to be bullish on the TRAN. Along that line of thinking, you would view the recent weakness in the TRAN as routine backing and filling. Conversely, further deterioration in the TRAN, perhaps a breakdown below 2650, would challenge any bullish thesis on the economy.

Technically, the TRAN closed at a significant level Wednesday. The long-term descending trend line that Jeff Bailey and I were trading off of earlier this year could now serve as support if, indeed, the economy is on the rebound and activity will continue to grow. That trend line currently sits right around the 2750 mark. From there, I think you've got downside risk to about 2650 -- the 38.2 percent retracement level of the bracket below.

TRAN - Weekly Interval

Again, if you're bullish on the economy, you have to then be bullish on the transportation companies -- the ones who will benefit first from an increase in economic activity. If you have a bullish view on the economy, then a way to implement that bias is through looking for TRAN stocks near meaningful support levels, where risk is easy to manage and the potential reward out weighs that risk.

Scanning the components of the TRAN, I found that CSX Corp. (NYSE:CSX) finished at a significant support level after Wednesday's slide. The company is the simplest of transports, operating a rail network in the eastern U.S, which spans from Mexico to Canada. The company is scheduled to report earnings on April 22, with consensus estimates calling for a profit of 33 cents per share. What struck me about the stock is that it stopped at its bullish support line, as well as a double bottom at $36. Coincidentally enough, the $36 level also happens to be the current site of the stock's 200-dma.

CSX - Point and Figure

It's pretty easy to manage risk right here with a stop at $35, $34, or $33, depending on risk tolerance, with an upside target in the low $40s. If the economy is on track for growth, then CSX should not breakdown below its very meaningful support levels below. If the stock does go on to breakdown below its support, such a move would say a lot about the state of the U.S. economy. As it relates to other sectors of the market such as tech and finance, a breakdown in the transports would bode poorly for stocks in general.

Growling Gorilla

The heavyweight in the PC business, Dell Computer (NASDAQ:DELL), reiterated its earnings guidance after the bell Wednesday. The company said that it was on track to earn 16 cents per share for its first-quarter on slightly better-than-expected sales. The news sparked a rally of about 30 cents in the after hours session. Other PC-related stocks ticked higher.

At its current rate, DELL is slated to earn 74 cents for its current fiscal year. That gives the stock a forward multiple of about 36. Going out to '04, Dell is expected to earn about 88 cents for the year. Assuming Dell hits its numbers in '04, that would mark an increase of about 19 percent over this fiscal year's numbers. That's not necessarily gangbuster earnings growth, perhaps not enough to justify the current multiple; let alone that 19 percent growth is two years away. So therein lies the problem with technology. So what that Dell reaffirmed guidance. The company needs to raise the bar, revealing that it's growing more than expected, in order to justify the multiple and warrant a higher stock price. If anything, Dell's reiteration could cause a short covering rally in tech tomorrow, but not a rally with legs.

Just Say No

Bristol-Myers' (NYSE:BMY) shocker after the bell further tarnished the once thought of defensive nature of the drug makers. The company announced a management shake-up while at the same time issuing a warning for this quarter and the full year. The stock, which was whacked for its ties to ImClone (NASDAQ:IMCL), was rocked in the after hours for more than $5. The Drug Sector Index (DRG.X) is threatening to take out its February lows. So much for defensive.

Know Your Risk

The bear that went into hibernation last fall is awake again. By most measures, the market looks suspect to further downside. The reasons for the renewed weakness are varied. Accounting fears are resurfacing, epitomized by the recent revelations at Adelphia (NASDAQ:ADLAC), which Jeff Bailey nailed more than 20 points ago! I'm sure there's more cockroaches where that one came from. The rising violence in the Middle East is a risk that is un-quantifiable, but one that has to be heeded. And then there's earnings season, or maybe the lack thereof.

The way that I'm personally trading is picking strong stocks, based on niche theses, such as the recent trade that Jeff Bailey profiled in the Market Monitor in Hanover Compressor (NYSE:HC). Aside from the small bullish operations, I'm looking for relatively weak stocks near actionable points, either near resistance or breakdowns. Given the two big back-to-back down days and the short-term pop in the VIX, I'm expecting a relief rally in the next day or two, which is why I've begun to lower stops on bearish positions, or lock in gains. There's plenty of profits to be made from the bearish side in this market, especially using puts with as low as the VIX still is. To dismiss the bearish side is a risk.

Eric Utley
Option Investor

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